States' Homestead Exemptions Are A Sticking Point In Bankruptcy Reform

April 6, 2001

Five states have homestead exemption laws -- which allow bankrupt debtors to shield their homes from seizure by creditors. But Congress is trying to reform the nation's bankruptcy laws to make it more difficult for people to escape their legitimate debts through bankruptcy.

The state homestead exemption laws are making it more difficult for Washington lawmakers to reach agreement on the bankruptcy reforms, according to reports.

The five states with homestead exemptions are Florida, Texas, Iowa, Kansas and South Dakota.

The Senate version of the bankruptcy bill contains a section capping the amount of home equity shielded from creditors at $125,000, while the House version of the bill would, in most cases, allow an unlimited exemption for equity in a home owned for more than two years.

Opponents of the Senate version have lined up support from the homebuilding and real-estate industries.

Lawmakers from homestead exemption states oppose it on states' rights grounds.

But proponents argue the bankruptcy bill would be a parody of reform if it cracked down on low-income credit card debtors, but allowed high-income debtors to keep their mansions.

There have been some highly-publicized stories in recent years of debtors who owed millions being allowed to keep homes worth millions in homestead exemption states. But such abuses are rare, experts say.